A Victorian Global Economy?

On Monday in the FT (so paywall but some free articles available if you register) Adam Posen wrote one of the smartest bits of analysis of the global economy I’ve read in a while.

The article was entitled “The global economy is now distinctly Victorian” and the core argument is that we are returning to a ‘Old Normal’ of largely unfettered markets and a political economy with more than a passing strong resemblance to the late nineteenth century.

Miliband identifies a series of connected global economic shifts – a movement of economic power from west to east, which in turn increases demands for resources and for the freedoms of the open society, which are in turn magnified by transformative technologies in areas like energy, communication, and manufacture, creating a sort of multi-directionally interconnected feedback loop, amplifying change and increasing interdependence and instability. Nor can these shifts simply be opted out of, as the new technologies themselves transmit both expectation and instability.

Posen, last January, summed up the Old Normal as follows:

The main conclusions that I would like you to take away from my claim that international economics will return for the next couple of decades to what I call the Old Normal of 1870-1910 are:

 Globalization in the form of integration of national economies and markets across borders will continue, with increasing support from important constituencies in emerging markets;

 As US hegemony, that is relative economic dominance, recedes into multipolarity, the international economic system will have less strict rule enforcement and be subject to greater economic volatility;

 The erosion of (intellectual and other) property right enforcement will have significant effects on the global division of labor, which will reinforce this multipolarity and income convergence;

 Price stability will prevail, with sharper fluctuations around low average inflation driven by real (relative price) shocks, and deflation will occur from time to time;

 More than one currency will play a global or reserve role, and the benefits in terms of lower interest rates from having such a role will diminish;

 International diversification of investment will increase, and so will the gross flows of capital, with capital accounts in the major emerging markets moving more towards balance if not deficit;

This is all very interesting and rather different from the international economic environment of 1990-2007 (the Great Moderation) or indeed 1945-1973 (the Golden Age), it certainly requires a different policy response.

As I’ve said, I think this is an interesting line of thinking. The parallels between Victorian and contemporary globalisation run reasonably deep (and here I am quoting from my essay I wrote for my part time masters in 2011, so please forgive the footnotes):

The late nineteenth and early twentieth centuries saw the ‘first major episode of globalisation’[1] marked by unprecedented flows of labour, trade and capital. This integration was brought about not only by a flourishing of free trade on the Continent in the 1860s and 1870s but more importantly by a revolution in transportation and communications technology.[2] As O’Rourke and Williamson have noted ‘sharply declining transport costs brought distant national markets much closer together than at any time before’.[3] The economic effects of this shift were profound; ‘formerly self-sufficient peasants in Russia, farmers in Kansas and artisans in Japan were brought into intimate contact with the world economy’.[4] The development of faster steam ships, more efficient engines and the opening of the Suez Canal in the second half of the nineteenth century together with the further development of railway lines and the laying of submarine telegram cables revolutionised the world’s communications networks. The flow of both information and goods increased exponentially[5], meaning that by 1880 ‘it became commonplace that the world had shrunk’[6] and the ‘annihilation of distance became a late-Victorian cliché’[7]. Much as in the contemporary era, technological change was driving an integration of the world economy, an economic integration that was accompanied by profound changes in politics.

There are are two points I’d add to Posen’s analysis. The first relates to his conclusions on how long lasting the Old Normal might prove. In his FT piece Posen argues that:

But as was the case from the 1840s until the first world war, today’s convergence and competition – and the volatility that results – can and I believe will persist for a long time without globalisation breaking down. It held up for a long time then because, even as there were arms races and conflicts, France and Germany, let alone the UK and the US, had an interest in maintaining the status quo.

This rather assumes that the breakdown of the late Victorian global economy came in 1914. The traditional approach is to assume that the globalised order was shattered by the Great War and a more regionalised world order replaced it in the inter-war period. However, many of the trends that came to prominence in the post-World War One era actually originated in the pre-war period.

Howe has argued that the traditional historgraphical view of the period 1870 to 1914 as a high age of globalisation and 1918-1939 as a period of deglobalisation is too black and white: ‘ [in the 1880s and 1890s] international exhibitions were replaced by colonial exhibitions; companies reorganised on an imperial basis; even education and patterns of travel to some extent became imperial, rather than cosmopolitan’.[8] To some extent the ‘regionalisation’ which characterised the inter-war global economy was already evident in the 1890s.

The second point I’d add is that how political elites view globalisation matters. For much of the Victorian period the political leaders of the global Hegemon (the UK) saw a free trading, integrated global economy as being to there advantage – by the end of the period there were many willing to question this.

As early as the 1880s ‘it had become obvious to many observers that Britain’s uniquely favourable mid-century position was slipping away under the pressure of competition’.[9]

One sign of the ‘pressure of competition’ was perceived relative economic decline. Such a decline was in many respects inevitable – Britain after all had been the first industrialised nation and its economic lead would diminish as other nations gradually industrialised. In absolute terms there was no decline in either economic activity or living standards over this period, ‘the notional ‘average’ British working-class family on the eve of the First World War consumed many more goods and services than their hypothetical grandparents in the 1870s’.[10] Export performance, the usual contemporary measure of economic vitality, was also strong in absolute terms with British exports growing by 23% between 1880 and 1900. However over the same period German exports grew by 63%.[11] The risk of Britain losing its pre-eminent international economic position was widely discussed during the late Victorian and Edwardian periods. Commenting on ‘poor’ export performance in 1910 The Times noted ‘some apprehension at our future prosperity as a manufacturing State’.[12]

This kind of talk seems eerily familiar to modern ears in the UK (the ‘global race’) and not too far removed from some of the political debate in the modern hegemon of the United States. Whilst British policy makers never really acted on this fears before the Great War, but it was an influential position afterwards.

The question for me, following on from Posen’s article, is for how long will political elites continue to consider globalisation beneficial? Will fears of relative decline trump conventional economic thinking?

I certainly don’t know the answers and obviously the parallel between the 1870s and 2010s is far from exact. But what is clear is that the nature of the global economy is changing and that will have profound political implications – policy makers planning on the basis that the world economy of the 2010s and 2020s will look much like that of the 1990s or 2000s are bound to be disappointed.

[2] Indeed O’Rourke and Williamson have utilised economic regressions to demonstrate that, in contrast to the post 1945 era of globalisation, technological improvements rather than policy shifts explain most of the nineteenth century convergence in global commodity prices. O’Rourke, K. and Williamson, J., Globalization and History. The Evolution of a Nineteenth-Century Atlantic Economy (London, 2000) pp. 55

Written by Duncan Weldon

Duncan Weldon was a Senior Policy Officer in the Economic and Social Affairs Department covering macroeconomics and regional policy. Before joining the TUC he had a fairly varied career taking in the Bank of England, fund management, the Labour Party…

2 Responses to A Victorian Global Economy?

Excellent and thoughtful article. Just one comment: I was under the impression that the last quarter of the 19th century and the first quarter of the 20th was a time of growing border restrictions on the movement of people. If that is correct, it would be another parallel with today’s growing concern about immigration.